Acquisitions are out: How companies like GE and General Mills partner with startups to avoid self destruction

Most established enterprises haven’t invented anything truly dynamic in decades. Procter & Gamble, the perennial most admired company (and my alma mater), has produced no transformational new brands since Swiffer and Febreze back in the early 2000s, although they have strengthened core brands with initiatives like Tide PODS, Gillette Fusion, and Pampers Swaddlers.

As in many mature companies, P&G’s people are more preoccupied with their career progression as P&G’s top-line growth has slowed. Promotions are few and far between. Leaders are drawn to the safe, the sure, the proven, the known. Blow themselves up? Many are afraid the tiniest failed experiment could stall their career. At the same time, they know deep in their bones that something has to give.

Among established enterprise companies, there is something akin to entrepreneurial envy. They covet the speed, scrappiness, vision, flexibility, and—let’s face it—“cool” factor of the best startups, the ultimate magnet for new talent. They realize they need to somehow capture it, reclaim a long-lost knack, without giving up everything that’s core to their business. In other words, imagine if Procter & Gamble had an amazing water-free technology to get clothes clean: how would they commercialize it without sacrificing Tide, Downy, or Bounce? The hope is that by bottling some form of entrepreneurship, a mature company can rejuvenate itself.

The classic way to seize the startup spirit is to acquire it, but a lot of executives at established companies I’ve talked to are now treating acquisitions more as a last resort. The bolt-on acquisition is very old-school. When it comes to dealing with startups, the new paradigm is partnerships.

Put differently, the old archetype is about getting married: acquire a company until death—or divorce—splits you asunder. The new model is about having affairs: fool around with partners—a lot of them—in order to suit your different needs. Why settle on one relationship when you can have many of them?

But for what purpose? Almost as many reasons as there are companies that engage in them. To acquire expertise in a particular area, for sure. Very often to add to a line of core businesses. But a surprising number of these companies use partnerships with startups in order to fish in new waters and see what the tides kick up. More remarkable still, the most forward-leaning legacy corporations are trying to remake themselves from within, relying on young companies to teach and reteach some basic lessons in how to innovate better, take risks again, reach decisions without painful complexity, develop new products and services more quickly, and recapture enough flair to draw the best and the brightest—both new hires and new customers—to the company.

A CASE STUDY IN CONTRASTS

There’s probably no better illustration of the partnership experience than a comparison of the efforts of General Mills and General Electric, each wrestling with the gargantuan labors of transforming themselves. Legendary companies both, they are at different points on the continuum when it comes to scaling the lessons of entrepreneurs across the enterprise.

Created in 2012, 301 INC started out as a new-product incubator for General Mills. But after launching eight new food products—one of them Nibblr, a snack-by-subscription service—the enterprise “hit a brick wall.” What happened? “We concluded we couldn’t ‘out-entrepreneur’ what was happening in the marketplace,” says John Haugen, a twenty-five-year veteran of General Mills and the boss of 301 INC. His team is tasked with reinvigorating the $17 billion (in sales) food company. More soberly, they realized the company was not creating new businesses at the pace it needed. “It’s not that you can’t find ideas; it’s that you don’t let enough great ideas in.” To be sure, it’s hard to think of a true blowout category General Mills invented—not something it acquired or bought into with another company—since Hamburger Helper, which was first introduced in 1971, or Nature Valley granola bars in 1975 (though Haugen does mention the company’s leadership in products like Go-Gurt, or Yoplait in a tube, and in bringing whole grains to many cereals).

What accounts for this kind of protracted dry spell? Haugen, who has spent half his life at General Mills, ticks off the usual reasons that innovation falters, ones that I have heard over and over again at large, mature corporations:

The wrong people are put in charge of innovation.

The right people parachute in, but they never have a chance to produce something great because, like everyone else, they’re constantly rotated in and out of divisions.

Both time and investment are insufficient.

There are “sandbox” issues, where the venture is too isolated from everything else at the company.

There’s a lack of authentic stories of trial, error, and success to help kindle excitement throughout the organization.

The corporate sword of Damocles—aka the constant threat of spending cuts—discourages innovation.

SMALL INVESTMENTS, BABY STEPS

So 301 INC morphed into a venture group. Now led by a team of fifteen, it rapidly invested in a handful of startups, including Epic Provisions (which it bought), Good Culture (an organic, high-protein redo of cottage cheese), and Rhythm Superfoods (kale chips, beet chips, and other “nutrient-dense” snacks). Recently it added to its portfolio D’s Naturals (plant-based performance products), Farmhouse Culture (probiotic foods and drinks), and Purely Elizabeth (ancient grain granola, oatmeal, muesli).

“We want to be an indispensable partner to these companies,” Haugen says. General Mills helps them with developing their sales channels, creating consistency in product quality, and building marketing and branding strategies, as well as strong overall operations. Often General Mills brings the new brands into their internal store, giving employees a chance to sample the new wares. At the same time, says Haugen, “I firmly believe this”—investing in startups—“is an important strategic tool to identify future growth for General Mills.”

This is toe-dipping into unknown waters, for sure. But aside from testing potential new product extensions, General Mills is enabling some bilateral learning when it brings these startups into the organization. Higher-ups start to understand what it is about their corporate climate that drives startups nuts—and sometimes out the door: the “black-hole” syndrome into which so many ideas disappear; the glacial pace when it comes to getting anything done; the fact that contacts, to say nothing of champions, constantly change and you never know whom you’re going to be dealing with next; and that executives can sometimes behave with incomprehensible arrogance. General Mills employees—especially millennials—get a boost, too. The more they get wind of what’s going on at 301 INC, the more likely they are to believe the company has ongoing relevance and staying power in the future.

A pretty lithe group, 301 INC operates with an internal committee of a half-dozen people who discuss key areas for investment. There’s a range of capital to deploy each year; the ante amount flexes to the shape of the idea and the scope of opportunity. Every investment still needs approval from the top. “I do this within the company balance sheet; we’re not a standalone,” says Haugen. He believes his team brings other benefits to the organization at large. A broad selection of General Mills folks can participate in biweekly “sample days,” to review products sent by startups and send back their unvarnished opinions. Overall, Haugen believes 301 INC “helps protect the company’s flank” by investing in brands that align with and might possibly bring new areas of growth to existing brands.

We’re now going to explore what’s been going on simultaneously at GE, where its large-scale reinvention is a few years ahead of General Mills.

The changes at GE are neatly embodied in a massive, company-wide movement called FastWorks, already in its fifth incarnation. The term embodies both a rough-and-tumble declarative goal, with an emphasis on speed, and a nod to its past—as in Edison Machine Works, a predecessor company to GE dedicated to electric motors and dynamos. The company has been moving away from its earlier history as rapidly as an organization with 170,000-plus salaried employees and numerous multibillion-dollar businesses can. It has jettisoned its real-estate portfolio, its appliance unit, and its finance arm. And it recently decamped from its pastoral headquarters in Fairfield, Connecticut, to set up in gritty, tech-happy Boston, in a twelve-story glass building that connects two old brick warehouses. The design by the architectural firm Gensler, which will be completed in 2018, is meant to marry history with the future.

All this signals a profound transformation of purpose. Long-serving CEO Jeffrey Immelt has said that GE will become one of the world’s leading software companies by 2020. That was laughable back in 2011, when he first went public with that ambition. Today, with a focus sharpened toward industrial businesses—aircraft engines, locomotives, power generators, oil and gas equipment, medical imaging—and cloud-based applications to make them run smarter and more efficiently, that goal isn’t so laughable anymore.

Along with this colossal realignment, GE Ventures has been partnering with one hundred or so startups, some working on products of strategic importance that are clearly in sync with its business, others engaged in helping the corporation rediscover agility and velocity. “I know from the partnerships we’ve had, we’re relearning the ability to be fast,” says Beth Comstock, the company’s vice chair, who oversees GE Business Innovations and has spearheaded FastWorks. “When you’re a startup, you don’t have a lot of resources, so you have to make decisions quickly—and based on what you have on hand.”

The multi-fronted efforts began in early 2011 with the hiring of William Ruh, a recruit from Cisco Systems, who took a $1 billion grubstake and set up a software subsidiary in San Ramon, California, to develop an operating system for GE’s industrial operations. That was its first big flag planted in Silicon Valley. Things quickly kicked into higher gear. That fall, Comstock attended a signing of Eric Ries’s new book, The Lean Startup, and told Immelt about its premise: that successful entrepreneurs quickly produce a minimum viable product (MVP) or service, seek customer feedback, and tweak accordingly. Commonplace practices for many startups, perhaps, but startling advice for GE and other established companies.

Immelt invited Ries, a tech entrepreneur, to present at GE’s Crotonville management campus. Soon after, GE co-opted him for several months. “We identified fifteen projects and incubated workshops in Crotonville, where Eric coached us,” recalls Viv Goldstein, GE’s global director of innovation acceleration and cofounder of FastWorks, which was launched in the summer of 2012 to codify lean principles.

FastWorks 1.0 was an attempt to provide “a customized GE framework for new services, products, and processes, and to market faster with customer testing,” explains Goldstein, a Brit whose decade at GE has immersed her in the disciplines of customer loyalty and corporate learning. “It was a big challenge. Back at their day jobs, people didn’t get it.”

But GE quickly tested the proposition. “We had a power generation turbine, a diesel engine that a team was going to launch,” remembers Comstock, whom I’ve known since the early 2000s when we shared best practices as chief marketing officers of P&G and GE. “The team said, ‘It’s going to take us five years to get us to market.’ ” But she was eager to discover whether lean principles, which worked so well in software development, could be applied to manufacturing. Talking to engineers, “you could just see the thought bubble over their heads: ‘Okay, smarty pants, I’m building gas turbines, I can’t make one change order in a year. So yeah, this is cute, but it’s never gonna work in the hardware world.’ ” But it did: GE created the machine in a year and a half.

“We have many other examples where working with startups, they’ve been able to help us move faster,” Comstock says. “Entrepreneurs are great at providing new products and services that extend existing lines.”

But they’re even more potent as change agents. “We needed to go outside ourselves to be reminded that we actually had capacity within ourselves all along,” Comstock explains. That might as well stand as a mantra for all mature enterprises. Companies who have successful startup partnerships are three times more likely to see major positive impact company wide. GE is a poster child for this finding.